Some Critical Lessons and Issues for Introspection…Part I
By Ramesh S Arunachalam , Rural Finance Practitioner
A. Background on NBFC MFI Model
Recently, Dr Rangarajan, one of the most respected figures in the Indian financial sector, remarked that the business model of the (NBFC) MFIs is faulty and this surprised me. And coming on the backdrop of Dr Y V Reddy’s statement that Micro-Finance could indeed be India’s sub-prime, it got me really worried…both about the MFI business model currently operational as well as regulation and supervision of the same…Hence this post…
The dominant MFI model is the commercial model where the MFI is registered as an NBFC with RBI and taps commercial funding (Debt and Equity) through different means. The model is based on fast tracked growth and generally carries a standard loan product – delivered to clients through joint liability groups and/or agents – based on weekly repayments and having loan related insurance. The emphasis is on – efficiency, standardised processes, large outreach and enhanced profitability – all elements of hardcore commercialisation.
While there could be some adaptations to the above model to suit different contexts, by and large, the above description is true of most NBFC MFIs, barring BASIX (which also engages in livelihood finance and tries to deliver other financial services and that makes them a little different). The dominant NBFC MFI model is also based on the notion that, to reach and include vast number of unreached and excluded people (including the poor), MFIs must tap commercial funding in a big way from lenders and investors – Mr Vijay Mahajan’s statement to this effect, when SKS was to tap the capital markets, resounds in memory. And to do this successfully, the model also believes that commensurate (market) returns must be provided to the commercial investors. It is important to note that much of the basic tenants of this (commercial) model have evolved from the global development of new wave micro-finance – which was spearheaded by several stakeholders including CGAP, especially since 1997 onwards[i].
While I look at issues pertaining to the NBFC MFI (commercial) model in a separate post, here, I focus on the regulatory framework as it pertains to these NBFC MFIs here.
I first attempt to share some opinions with regard to regulation of these NBFC MFIs and then, I set out to describe some basic facts about this crisis before raising issues and questions relevant to the regulatory framework that governs these NBFC MFIs…
Further, I would also like to clarify that my objective in doing this exercise is to bring to the attention of the respected RBI Sub-Committee and Respected Board Members of The RBI, various aspects related to regulation and supervision of NBFC MFIs and priority sector lending in India – so that they can bring about appropriate changes to overcome prevalent weaknesses, if any, in the existing framework. The intent here is certainly not to find fault with any individual or department or regulator/supervisor – given their enormous tasks and operational constraints, the work of The RBI and its departments are sincerely well appreciated but at the same time, it is important to constantly strengthen the regulatory and supervisory framework…especially, with inputs from the field…That is the primary objective here
Read the rest on the Microfinance in India Blog